Why You Should Set-up Your Company’s Business Credit Before You Need It
Establishing business credit is becoming more complex in the global economy. Supply chain uncertainty has become a major concern for many US companies. It’s also a growing reason that many companies are seeking business loans in 2021. Capital funding for the purposes of ensuring an adequate and timely supply of goods is exploding according to iCapitalFunding CFO, Robert Kleiber. iCapitalFunding provides capital for small-to-medium-sized businesses.
“We are seeing a surge in companies seeking to finance larger purchases of raw materials and supplies due to the disruptions in the global supply chain,” says Kleiber.
Denver-based Felene Inc, a maker of distilled spirits is a prime example of the need for manufacturers like distilleries to increase purchases of raw materials and packaging supplies.
“We are seeing a severe shortage in glass bottle availability,” says Felene President, Kim Laderer. What we used to purchase on a two-to-three-week lead time is now taking eight-to-ten weeks minimum”, added Laderer.
Laderer’s company manufactures sugarcane vodka in Denver Colorado and says that in addition to shortages, there is also the associated rise in cost due to scarcity. She says that her distillery peers are almost all saying the same thing. “As an industry we are facing a very critical time in the year when we do almost 60% of our annual business. At this point many distilleries would be expecting bulk shipments of glass bottles to take them through the holiday season. If you did not order in bulk two months ago you may find yourself without glass bottles for the final three months of the year,” says Laderer.
Learn About Your Funding Options
Some producers such as Felene say they are relying on a mix of business financing options to fund larger purchases much further in advance than they would ordinarily do. Laderer says her company is not taking any chances with a further disruption in supply chain stability.
“We were aware of the magnitude of the risks to the supply-chain earlier in the year”, says Laderer. “The first thing we did was to consolidate our purchases and tightened discretionary spending so we’d have enough capital to make lager purchases and get prepared to sit on that material in stock for longer than we would ordinarily hold inventory. We also, secured lines of credit in advance as well as other sources of business financing.”
Sources of Business Credit
A traditional bank loan is out of reach for many small businesses, especially startups since lenders have tightened qualifying requirements. So for many new businesses and early-stage companies, they will need to look elsewhere to raise capital. This is where understanding what types of small business loans fit your company’s business needs can pay-off. Doing some due diligence on your business idea could save thousands of dollars in finance costs.
Banks and Traditional Financial Institutions
Small business owners with good credit, a solid credit history and a high credit score should try to get a loan from a bank or other traditional financial institution because these lenders will likely provide the lowest cost of capital, because you will likely find they will offer the lowest interest rates and repayment terms and lower monthly payments on borrowed funds.
You will need to go through a rigorous and formal loan application process with these lenders, but it’s usually the best source of financing. Keep in mind that banks are also the primary source of Small Business Administration (SBA) loans. SBA loans are the holy grail of loans so if you qualify, take that path.
For working capital loans a borrower will need to provide a business plan, furnish tax returns and show balance sheet reports for several years.
Many manufacturers will offer financing or leasing terms (usually through a financing company) to help acquiring needed equipment. The providers of the financing will usually use the equipment as collateral. Equipment leasing has a lower threshold of qualifying than a traditional business loan. In addition, the company can upgrade their equipment in the short term as their business grows. Leasing offered the upgrade capability that purchasing did not.
Instead of paying cash for distillery equipment Laderer says the company looked to equipment leasing to keep the cash reserves liquid. “This is a global battle with a lot of customers fighting for limited resources. It’s pretty simple, someone is going to be left-out without the ability to bottle, it’s just simple math,” says Laderer.
The company says they prepared like they were going to battle. They limited discretionary spending and allocated cash reserves to purchasing raw materials and packaging supplies in bulk. In addition, they established relationships with funding providers and mapped-out a financing strategy that would allow them to make large purchases of goods that were becoming increasingly difficult to source.
“For Felene, we were hoarding cash and establishing credit lines to buy effectively. It’s kind of similar to buying an insurance policy,” explained Laderer.
So for large equipment purchases, the company opted to lease versus buying. This cut monthly “cost of ownership” and freed-up free cash flow.
“It made perfect sense for us to re-direct free cash-flow to non-capex purchases. We know we will use the materials and our “insurance premium” is the time value of the additional purchase price. Considering the alternative, that was a very small price to pay and an easy decision”.
In addition, the company is building its business credit through their lease programs.
Credit Cards and Business Lines of Credit
But Laderer and Felene also took an additional “insurance policy” to protect against supply-chain risk. They actually establish a relationship with a funding source to set up business finance options if needed in the future.
Startup businesses will generally rely on a strategy of bootstrapping operational costs – or put plainly-minimize expenses. This may mean doing things manually as opposed to buying automation equipment. Bootstrapping also means occasionally used personal funds for business expenses. This includes making business purchases on credit cards in the short term.
While credit cards usually carry high interest rates, they are a lot easier to acquire than traditional loans. Over time, it may be possible to get a small credit line on a credit card from the bank where you do business. This will also help you establish credit in the future.
Similarly, talk to your banker about a small business line of credit. This is one advantage of having a relationship with a small bank. Start small, pay-off your balances over time and grow your credit profile.
Selling Stock and Equity Financing
As an alternative to borrowing, small business owners may consider selling shares in their company to investors. This can be a complex process and may require consulting a securities attorney and your accountant.
There are many ways to raise capital from investors. We’ll address a few more popular strategies here.
- Venture Capital companies are professional investment companies that look for new businesses to invest in. In addition to providing an infusion of cash, you should consider what other resources they can provide. This may include management advice, access to markets and companies they also invest in. But be advised, venture capitalists are pros and will likely look to acquire a large share of your company.
- Angel Investors are generally private individuals (friends and family) that will provide business owners with start-up capital in exchange for a percentage of ownership in your company.
- Crowdfunding is a way to raise small amounts of cash from many people. This has become a popular activity online. If you have a catchy idea it may be a novelty for people to spend a few hundred dollars.
These funding options a just a few alternatives to raise capital for your small business. The best advice is to take a longer-term view and be financially responsible.
“The best time to arrange for funding is when you don’t need it desperately,” said Laderer. Our business has been growing steadily and we are profitable. But like any business, we will need growth capital to get to the next step. By starting a relationship with our capital providers as a normal course of business, we know have a lot more financing options.”